Philippines' Flip-Flop Of Rules Leaves Foreign Firms Wary

THE disqualification of the bid by Consolidated Electric Power Asia Ltd. to build the Philippines' first natural-gas-driven power plant has generated concern among foreign investors as to the stability of the country's investment rules.

In May, CEPA, a subsidiary of Hopewell Holding Ltd. of Hong Kong, won the bid to build and operate the 1,200 megawatt plant. The $1.5 billion bid edged out nine other prequalifiers. CEPA's technical partner was Japan's Mitsubishi Heavy Industries Ltd. Mitsubishi's technology is based on a gas turbine developed by Westinghouse Electric Corp. of Pittsburgh.

The problem is that the state-owned National Power Corp. (NPC) has banned Westinghouse products in the Philippines since 1992, after the Philippine government lost a lawsuit in New Jersey over allegations that the company bribed the late President Ferdinand Marcos to build a nuclear plant in Bataan in the mid-1980s. The case is under appeal.

CEPA denied a Westinghouse link, but the government rejected the company's claim and has set a rebidding for Oct. 26 open to all 27 consortiums that originally participated. The winner will be announced in January.

Despite pressure from American and Japanese governments not to rebid, the NPC says it is firm in its decision not to use Westinghouse technology. The prequalified bidders are threatening to sue.

Analysts say they consider the negative effect of reopening the bidding short-term if the bidders don't carry out their threats to sue NPC.

"In the long run, the effect is minimum," says a power-industry executive. "There is too much business around. The bidders will charge it off to experience and get on with business, as long as the NPC is not seen to make a habit of reversing itself too often."

A corporate, political mess

Still, the rebidding has all the ingredients of a corporate and political mess. All parties are unhappy, as everyone seems to have lost out. NPC also disqualified the second-highest bidder, AES Transpower Pte Ltd./Nichimen, because it proposed using the Westinghouse 501F turbine. It bid at $2 billion.

The United States and Japan have threatened to make this a trade issue against the Philippines if a rebid occurs.

US Commerce Secretary Ron Brown, a group of six US senators, and a group of 11 House representatives wrote separate letters to President Fidel Ramos, Energy Secretary Francisco Viray, and NPC President Guido Delgado warning of consequences if rebidding proceeded.

"Unless fairness is provided to all bidders, US developers would be discouraged from pursuing future investment opportunities in the Philippines," the letter from the congressmen to President Ramos stated.

Mitsubishi Corp. contends that the 501F turbine was jointly developed with Westinghouse, but the partnership ended in 1991. Therefore, it was no longer a Westinghouse licensee nor does its turbine contain Westinghouse technology, the company maintains.

In a letter to the NPC, Mitsubishi Corp.'s managing director, Yasuo Nagai, states: "[We] hold ourselves ready to make further explanation to your full satisfaction."

Award to lowest bidder

The pressure was on NPC to award to the next lowest bidder, in this case Marubeni, in a consortium with Sithe Energies Inc. and Raytheon Constructors. The bid, featuring a General Electric turbine, was at $2.08 billion.

But NPC could not award the plum to Marubeni, Mr. Delgado explains, because it would increase the cost of electricity equivalent to $82.6 million annually, or a total of $1.65 billion for the entire 20-year contract.

While lawsuits are one element for the NPC to consider, it is the larger image of the Philippines as an investment site that ultimately suffers from this flip-flopping of rules.

Former Foreign Secretary Raul Manglapus, who now chairs the state Philippine National Oil Company, urged Ramos to award the contract to Marubeni. He warned: "A rebid would have a damaging impact on future infrastructure development in the Philippines. A rebid would send a dangerous message to the international community that our process is not a fair and transparent one."

Legal suits, if carried out, will delay the Philippine government's $5 billion gas-field development project, which involves tapping off-shore natural gas from northwest Palawan. The controversial plant is to be located in Batangas province.

Mr. Viray insists that the delay would not be significant. "A project timetable well within the target commercial operation [of] January 2001 has now been finalized," he says.